Category Archives: News / Updates

News / Updates

Year-End Tax Planning Ideas

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Year-End Tax Planning Ideas

The year end is approaching us fast and it’s time to consider some of the year-end tax planning ideas.  Here are some of the year-end tax saving moves to consider:

  • Even if your business uses an accrual basis method to account for taxable income, expenditures to related-parties are generally deductible in the year of payment rather than when they are occurred. Therefore, we recommend settling the liabilities before the year end to take the related deduction in 2016.
  • C-corporations should consider paying out reasonable amount of bonus to employee-shareholders to avoid double taxation. Note that compensation to employee-shareholders must be reasonable in amount and nature to avoid potential challenges from the taxing authorities.  Best practice is to adopt a written bonus plans that meets the industry practice and expectation.
  • If your business needs to make capital expenditure, why not putting it in service now and enjoy the 50% bonus depreciation and section 179 deduction now rather than next year?
  • Many business owners will be hosting Christmas parties. Learn how to structure the event to deduct 100% of event related expenses including meals.
  • Minimize capital gains tax by timing the gain or loss realization. Capital losses are generally deductible to the extent of capital gains.  So if you are looking at big gains for the year, maybe it’s time to trigger losses on built-in loss capital assets you may have been holding on to.  Or if you have excess capital losses, consider selling some built-in gain capital assets.  Timing is everything when it comes to managing capital gains tax.
  • Year-end is a perfect time to review employee benefits and compensation. Some of the qualified plans will provide opportunity to defer taxes until retirement for employees and owners.  They are SEP, SIMPlE, 401(k), profit-sharing, and pension plans.  Additionally, the business deduction is readily available for funds contributed to the these plans.
  • Review opportunity for various federal and state tax credits, including research and development, small business health care credit, work-opportunity tax credits, etc.
  • Individuals should consider prepaying property taxes and making charitable contributions of non-cash goods and/or cash. Also, perform a year-end tax projection and prepay state income taxes, if you are not subject to AMT tax.
  • Cash basis taxpayers may be able to defer income recognizing by delaying billing and collection until next year.
  • Inventory is generally valued at lower of cost or market value. The end of the year inventory should be reviewed to detect obsolete or damaged items and written down to their probable selling price (net of selling expenses).  Tax deduction for write off is available as long as the items are offered for sale within 30 days after the inventory date.
  • Perform a year-end tax projection to submit required estimated tax payment timely to avoid any penalties and interest.
  • Individuals should consider maximizing contribution to qualified retirement funds including 401(k) and traditional IRAs to defer income taxes.
News / Updates

Tax Accounting for Stock Compensation

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Tax Accounting for Stock Compensation

FASB issued ASU 2016-09 simplifying accounting for stock based compensation under ASC 718. The amendments are effective for annual periods beginning after December 15, 2016 for public entities and after December 15, 2017 for all other entities. Early adoption is permitted. Our discussion will be focused on tax accounting aspect as summarized below:

Previously, reporting entities were subject to complex rules in accounting for the differences in tax deductions resulting from the exercise of stock compensations and how they were accounted for in the income statement. The rules under ASC 718 required reporting entities to track APIC pool, determining excess benefit and short-falls, and were required to consider recognition threshold for excess benefits (causing significant difference in book and tax attributes in certain situations). However, the amendments significantly simplify the accounting for share based compensation.

Under the amendments, reporting entities treat the tax effects of exercised or vested award as discrete items in the reporting period in which they occur, and recognize excess tax benefits and short-falls through income statement without regard to the APIC pool and regardless of whether the benefit reduces taxes payable. Accordingly, reporting entities are no longer required to maintain APIC pool.

Reporting entities shall apply the amendments on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period, and disclose the nature of and reason for the change in accounting principle and the cumulative effect of the change on retained earnings or other components of financial statements. Under the modified retrospective transition method, reporting entities will apply the overall amendments on a prospective basis and recognize previously unrecognized excess tax benefits as cumulative adjustment to retained earnings.

Please refer to the ASU 2016-09 for further detail.

http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168028584&acceptedDisclaimer=true

News / Updates

트럼프의 세금 정책

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트럼프의 세금 정책

미국 제 45대 대통령 선거가 공화당 후보 도날드 트럼프의 당선으로 끝났다. 트럼프는 “Make America Great Again”이라는 그의 선거 공약과 함께, 오는 2017년 1월 20일부터 미국 제 45대 대통령으로 취임하게 된다.

공화당이 상원의원과 하원의원 또한 독점하게 되면서, 트럼프의 대통령 취임후 그가 내세운 세금 정책이 우리의 삶에 큰 영향을 미칠 것으로 예상된다. 트럼프가 대통령 공약으로 내세운 세금 정책은 아래와 같다.

I. 법인세 세율 15%로 인하 – 미국은 현재, 세계에서 39.1%로 세번째 높은 법인세 세율을 가지고 있다 (연방정부 세율 35%와 주정부 세율). 트럼프는 모든 사업체에 15%의 단일 연방 세율을 적용하여 사업체의 자금력을 높이고 일자리를 창출을 도모한다는 공약을 내세웠었다. 이 공약이 실현된다면, 국제 시장에서의 미국 사업체들의 경쟁력은 더 높아질 것으로 예상된다.

II. 해외 미국 회사들의 수익을 미국으로 반환 - 현 미국 세법상, 미국 회사의 해외 자회사의 해외 유보이익에  부과되는 미국 세금은 관련 이익이 미국 주주들에게 배당 될때까지 연기되는 것이 일반적이다.  미 정부는 2015년, 약 $ 2.6 trillion 상당의 해외 자회사의 해외 유보이익이 미국 주주들에게 배당 되지않아, 법인세가 부가되지 않았다고 발표하였다. 이에, 트럼프는 해외 자회사의 배당되지 않은 유보이익에 단 10% 정도의 세금만 부과 함으로써 해외 자회사의 자금을 미국으로 귀환시키는 방안을 소개하였다. 이를 통해,  미국의 일자리 창출과 사업체들의 번창에 큰 기여를 할 수있을 것으로 보인다.

III. 미국 제조업 회사에 주어지는 세금 혜택 - 트럼프는 미국 제조업 회사의 자산 (기계,장치,차량 등.) 투자를 전액 비용처리 할 수 있는 방안을 공약으로 내세웠다. 덧붙여, 트럼프는  미국 현지 육아 관련 세금 공제 한도를 올리고, 회사가 피고용인들에게 보조하는 육아 관련 지출을 과세 소득에서 제외 시킬 수 있도록 하겠다고 하였다.

IV. 개인 세율에 관한 혜택 – 현재, 미국은 개인에게 39.6 %의 최대 한계 세율과 3.8%의 순수 투자 이익에 관한 세금을 부과하고 있다. 트럼프는 현재의 7개의  세율 계층을 3개로 줄이고 ( 12%, 25%, 33%), 순수 투자 이익 관련 세금 (3.8%) 을 폐지하겠다고 하였다. 또한, 그는 AMT 세금 제도도 없애겠다고 공약하였다.

V. 유산세 폐지 – 현 미국 세법은 $ 5.45 million 을 초과하는 유산에 한하여 40%의 유산세를 부과하고 있다. 트럼프는 세금 개혁을 통해, 이와 같은 유산세를 폐지하고, 수혜자들은 추가적인 세금없이 유산을 상속받을 수 있게 하겠다고 하였다.

VI. 오바마 케어 폐지 – 트럼프는 오바마 케어라고도 불리우는 “Affordable Care Act” 에 관해 부정적인 의견을 가지고 있다. 그는 오바마 케어를 폐지하고, “절대적으로 적은 비용”이 요구되는 건강보험제도로 이를 대체하는 방안을 추천한다. 선거 유세 동안, 그는 오바마 케어에 대한 대안으로, 비용부담이 훨씬 적은 건강 보험 제도를 설립하기 위한 정책을 몇 가지 소개해 왔었다. 이러한 정책은 비과세 건강 보험 계좌 설립, 높은 공제 금액을 적용할 수있는 건강 보험, 그리고 건강 보험 회사들에게 각 주별 차이를 두지 않고, 보험 상품을 팔게함으로써 건강 보험 회사들간의 경쟁을 높이는 방법 등이 있다.

트럼프가 위와 같은 세금 정책들을 공약으로 낸 것은 사실이나, 아직 이 정책들이 확정된 것은 아니다. 그러나 차후 그가 대통령으로 취임했을 때, 위와 같은 세금 정책이 실현 될 가능성이 농후해보이며 이에따라서 우리는 그가 공약한 세금 정책들에 대한 알맞은 정보를 바탕으로 계획을 준비 할 필요가 있다.

News / Updates

Trump’s Tax Policy

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Trump’s Tax Policy

The 58th U.S. presidential election of 2016 is over. The Republican Party nominee, Donald Trump, defeated the Democratic Party nominee, Hillary Clinton. Trump is expected to take office as the 45th President on January 20, 2017 and he promises to ‘Make America Great Again!’

With Republicans’ domination over the House and Senate, we can expect many of Trump’s tax policy will have big impact to our lives shortly after his administration takes off. Here are some major tax reform Trump promised during his presidential campaign:

Corporate Tax Rate Reduction to 15% - the United States has the third highest general top marginal corporate income tax rate in the world at 39.1 percent (consisting of the 35% federal rate and a combined state rate). Trump vowed to introduced a single corporate federal tax rate of 15% to all businesses in an effort to put more money into the hands of businesses to create more jobs and investments in the U.S., which would allow U.S. businesses to be more competitive in international market.

Repatriation Holiday - under present law, the U.S. tax on foreign earnings of foreign corporate subsidiaries is deferred until it is distributed back to the U.S. shareholders, generally. The government estimates as of 2015, approximately $2.6 trillion of earnings of foreign corporate subsidiaries has not been taxed and is undistributed. Trump plans to introduce a special corporate tax repatriation holiday rate whereby corporations with money stashed overseas would be able to pay a tax rate of 10% on that income in order to bring the money back into the U.S. The repatriated cash would then be reinvested in the U.S. creating jobs and expansion of U.S. businesses.

Pro-U.S. manufacturing – Trump plans to allow firms engaged in manufacturing in U.S. to elect to expense capital investment in lieu of taking deduction for interest expense. Additionally, Trump promised to increase cap on business tax credit for on-site childcare and allow businesses that pay a portion of employee childcare expenses to exclude those contributions from income.

Individual Tax Rate – currently, individuals are subject to top marginal tax rate of 39.6% plus 3.8% of net investment income tax. Trump plans cutting the current seven brackets down to three: with 12%,25%, and 33% rates, and would repeal the net investment income tax. Additionally, he plans to eliminate AMT tax regime.

Elimination of Estate Tax – currently, the U.S. government charges death tax or estate tax of 40% on estate with value in excess of $5.45 million. Trump’s tax reform would eliminate death tax. Rather, the beneficiaries of an estate take the assets with a tax-free, with no “stepped-up” basis. For rich, best time to die is during Trump’s presidency for estate tax planning purposes.

Obamacare – Trump believes the Affordable Care Act, also known as “Obamacare,” is a total “disaster” and has failed on cost and quality of health care. He proposed to repeal and replace Obamacare with “something absolutely much less expensive.” During his campaign, Trump proposed a series of measures that would allow people to buy affordable health insurance policies outside of the Obamacare exchanges. These measures include promoting tax-free health savings accounts, high-deductible health plans and health savings accounts, and boost competition in health insurance market by allowing insurers to sell policies across state lines.

News / Updates

Unilateral APA Application by Maquiladoras

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Unilateral APA Application by Maquiladoras

The IRS announced in IR-2016-133 that US taxpayers with maquiladora operations in Mexico will not be exposed to double taxation if they enter into a unilateral advance pricing agreement (APA) with SAT through a “Fast Track” program introduced by SAT in October 2016.

Currently, the SAT has over 700 pending unilateral APA applications filed by maquiladoras covering tax years 2014 through 2018. The IRS and SAT entered into an agreement adopting the Fast Track program to timely address the current inventory of pending APA applications.

The new maquiladora framework is an election that SAT would offer to qualifying taxpayers with pending unilateral APA requests with the SAT. The program excludes (1) maquiladoras with annual revenue in excess of 1.2 billion pesos and (2) maquiladoras with a principal company located outside of the United States. The program offers the following options:

  • Qualifying taxpayers may elect to apply the new maquiladora framework in a unilateral APA with the SAT. Because the transfer pricing framework adopted under SAT’s program was discussed and agreed upon with the U.S. competent authority in advance, the transfer pricing results set forth in unilateral APAs executed between SAT and the maquiladora will be regarded as arm’s-length for US tax purpose.
  • Qualifying taxpayers that decline to elect to apply the new maquiladora framework may either:
    • Continue applying for a unilateral APA using traditional approach.
    • Use safe harbors provided in the 1999 agreement; or
    • File a request for a bilateral APA with the US and Mexican competent authorities.

It is expected that qualifying taxpayers with pending unilateral APA with the SAT will receive an election notice shortly (Unofficial source indicates that the SAT will contact the current APA representative or consultant first). The notice will include details on the steps the taxpayer must take regarding its pending unilateral APA request. Qualifying taxpayers should contact their APA representatives for further detail.

https://www.irs.gov/pub/irs-news/ir-16-133.pdf?_ga=1.134315953.1959233956.1449872249

 

News / Updates

IRC Section 385 Final Regulations

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IRC Section 385 Final Regulations

On October 13, 2016, IRS issued final and temporary regulations under 385 addressing the treatment of related party debt.  The final and temporary regulations treat as stock certain related-party interests that otherwise would be treated as indebtedness (the “Request Rule”) for federal tax purposes and established extensive contemptuous documentation requirement (the “Documentation Rule”) with respect to related-party indebtedness.  The Request Rule is effected April 4, 2016 and the Documentation Rule applies to debt instruments issued on or after January 1, 2018.  See our newsletter at http://www.kyjcpa.com/news-updates/proposed-section-385-regulations/ for general overview of the regulations.

The final and temporary regulations retain much of what was previously proposed back in April but reflects certain modifications summarized below:

  • The final and temporary regulations apply to US indebtedness only. Initially, the regulations were drafted to be applied to all related-party debt instruments (both in-bound and out-bound), but the regulations were finalized to excludes foreign debts.
  • The final and temporary regulations eliminated bifurcation rule included in the proposal. Initially, the regulations were drafted to permit the IRS to characterize certain instruments as part debt and part stock, but this bifurcation rule was excluded from the final and temporary regulations.
  • The final and temporary regulations apply to disregarded entities and partnerships having interest in US corporations with related-party debt instruments.
  • The Documentation Rule applies to instruments issued on or after January 1, 2018 and is considered contemporary if completed by the due date of the return (including extension).

Note that the Documentation Rule apply to debt instruments issued by the expanded group with (1) publicly traded stocks, (2) total assets exceeding $100 million, or (3) total revenue exceeding $50 million.  Additionally, a related-party debt instrument will not be treated as stock if, when the debt is issued, the aggregate issue price of all other related-party debt instruments that would be treated as stock does not exceed $50 million.

 

News / Updates

CbC Reporting Final Regulation

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CbC Reporting Final Regulation

IRS issued final regulation related to new country-by-country reporting requirements for ultimate parent entity of a multinational enterprise group (MNE) with revenue of $850M or more.  This new filing is required for tax years beginning on or after June 30, 2016.  So a calendar year taxpayer would be subject to the filing requirement (Form 8975 – the form is still under development)  with its 2017 tax return.  This new reporting requirement was implemented to confirm with the rules of the OECD’s action plan on BEPS.

An UME of a US MNE group is defined as a US business entity that controls a group of business entities, at least one of which is organized or tax resident outside of the US, that are required to consolidate their accounts for financial reporting purposes under US GAAP, or that would be required to consolidate their accounts if equity interests in the US business entity were publicly traded on a US security exchange market.  The regulation require an MNE group to report on a country-by-county basis income and taxes paid, and the business activity of foreign operations.

Please see the Internal Revenue Bulletin 2016-29 for additional detail.

https://www.irs.gov/irb/2016-29_IRB/ar05.html

News / Updates

California Competes Tax Credit

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California Competes Tax Credit

The California Competes Tax Credit is a negotiated income tax credit program created to attract and retain businesses in California creating job opportunities and economic boost.  The credit is awarded through a two-phase competitive process and based on several factors including:

  • Number of full-time jobs created
  • Compensation paid to employees
  • Amount of new capital investment
  • Business economic impact

The California Competes Tax Credit applies to income tax owed to the Franchise Tax Board.  The credit is non-refundable.  If the credit allowed exceeds the tax due, the excess may be carried over to reduce the tax in the following year, and the succeeding five year if necessary, until exhausted.

Credit applications for the fiscal year 2016-2017 will be accepted:

  • January 2, 2017 through January 23, 2017 ($100 million credit available)
  • March 6, 2017 through March 27, 2017 ($68.3 million credit available)

If you are planning or considering to start or expand business in California, please contact us immediately and get your fair share of allocated government funds!

News / Updates

Independent Contractors Vs. Employees

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Independent Contractors Vs. Employees

The US Government estimates that approximately 3.5 million employees are classified as independent contractors when they are in fact employees in each year.  This misclassification costs the US Government approximately $55 billion of income taxes and $15 billion of unpaid FICA and unemployment taxes in each year.  For this reason, on-going efforts have been made by the US government to detect misclassification of employees during income tax audits.  Additionally, many state governments have implemented their own examination process to minimize their state tax revenue loss due to the misclassification.

Many employers misclassify employees as independent contractors for a simple reason of saving tax money.  Misclassification can save substantial amount of expenses including employer’s share of Social Security and Medicate taxes, overtime pay, unemployment compensation tax, and workers’ compensation insurance.  However, this practice can cause substantial amount of taxes, penalties and interest, and perhaps criminal charges in some cases, in addition to the potential claims by employees for unpaid compensations (including overtime pay, sick pay, vacation and holiday pay).  Let’s break down the potential tax penalties that employers may face if the misclassification is found to be unintentional:

  • $50 for each reported W-2.
  • 5% failure to withhold income taxes.
  • 40% of employee share of FICA taxes.
  • 100% of employer share of FICA taxes.
  • Up to 25% of failure to pay tax penalties.

IRS looks at degree of control exercised by the employee in determining whether or not a worker is an employee or independent contractor.  Generally, there are three factors, under the Common Law Rules, that should be carefully reviewed in classification.  They are:

  • Behavioral Control – Does the payer control or have the right to control what the worker does and how the worker does his or her job?
  • Financial Control – Are the business aspects of the worker’s job controlled by the payer? These include things like how worker is paid, whether expenses are reimbursed, who provides tools and supplies, etc.
  • Type of Relationship – Are there written contracts or employee type benefits?

If determination of employee or independent contractor based on the above mentioned factors is unclear, payor can submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and IRS can officially determine the worker’s status.

Also, payors do not have to cover independent contractors under workers’ compensation insurance, and not liable for payments under unemployment insurance, disability insurance, or social security with the state taxing authorities.  Misclassification may expose employers for sever penalty provisions by state government and there are many state agencies (including the Employment Development Department, Division of Labor Standards Enforcement, Franchise Tax Board, Division of Workers’ Compensation, and the Contractors State Licensing Board) with their own regulations or requirements concerning independent contractors enforcing proper classifications.

 

Take Away

Because the potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee, each working relationship should be thoroughly researched and analyzed before it is established.
News / Updates

US Operation of A Foreign Corporation – Subsidiary vs Branch

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US Operation of A Foreign Corporation - Subsidiary vs Branch

U.S. business activities of foreign persons generally are conducted either through a US subsidiary or a US branch.  There are vast differences in the US tax treatment and legal ramifications of these two forms, as briefly summarized below:

US Subsidiary

A US subsidiary of a foreign corporation is taxed as any other domestic corporation, that is, as a separate taxable entity apart from its foreign parent.  A US subsidiary determines its taxable income by including income and expenses it earns and incurs.  In determining a US subsidiary’s taxable income, transactions between the subsidiary and its foreign parent are recognized for tax purposes, subject to arm’s-length pricing rules provided under IRC section 482 and regulations thereunder.  In summary, by maintaining separate books and records, income and expenses earned and incurred by the US subsidiary will be subject to US taxation, generally.

Additionally, in general, by incorporating a separate and distinct legal entity, the foreign corporation has the protection of the “Corporate Veil.”  In other words, the subsidiary is solely liable for its own debts and obligations and its owners (the foreign parent corporation) are sheltered from them, generally.

US Branch

In contrast, a US branch of a foreign corporation is not treated as a separate taxable entity, and thus transactions involving the US branch with the foreign corporation, including other branches of the foreign corporation, generally are not recognized for tax purposes.  Instead, the Code and regulations under IRC sections 864 and 882 employ a special set of rules that allocate and apportion to the US branch a portion of the foreign corporation’s worldwide income in order to determine the net income subject to US tax.

IRC section 864(c) sets forth the rules that determine the gross income effectively connect to a foreign corporation’s US business.  As the name implies, these rules generally require that there be some connection to the foreign corporation’s US business activities for the income in question to be treated as effectively connected.   In other words, based on the level of US branch’s participation in the transaction, the gross income of the foreign corporation is allocated to the US branch.  Because of this subjective nature of determining US source income for the branch, it is one of most frequently questioned and challenged tax issue during an income tax audit of a US branch of a foreign corporation.

Deductions generally are apportioned to the US branch under complex regulatory formulae set forth under IRC section 882 and regulations thereunder, not necessary tailored to the specific facts relating to a particular US branch.  Further discussion is omitted since it is beyond the scope this email communication.  Additionally, a US branch of a foreign corporation is subject to “branch profits tax” which approximates the taxes on dividend.

Contrary to the above mentioned income and deduction allocation and apportionment rules set forth for a US branch of a foreign corporation under the current US tax laws, some foreign corporations with branch operation in US determine its US taxable income under so-called the “Separate Entity Method.”  Under this unauthorized method, like a US subsidiary, a US branch would determine its taxable income by including income that it receives or accrues and deducting expenses that it pays or incurs.  Again, this approach is in contrary to the current tax laws, and exposes the foreign corporation for substantial tax risks.

Additionally, because a branch is not a separate legal entity, branch offices do not offer the same projection to their owners as they are simply a legal extension of the head office.  Hence any legal claim against the branch can be directly passed on to the foreign corporation located overseas.

***

<한국어버전>

 

미국으로 진출하는 회사들은 보통 지사 (Subsidiary) 또는 지점 (Branch) 을 설립하여 운영한다. 두 방침은 아주 다른 US tax consequences와 legal ramification이 있으며 아래에 두 방침의 차이점을 간략하게 설명한다.

지사 (Subsidiary)

외국회사의 미국지사는 독립적인 기업으로 간주되며 US tax 또한 지사 자체의 손익손실에 따라 적용된다. 단, 특정관계거래에 대한 이전 가격 연구 (Transfer Pricing) 가 필요하다. 또한 독립적인 법인으로써 지사의 법적문제는 외국 본사에게 영향이 없다고 볼 수 있다.

지점 (Branch)

외국회사의 미국지점은 독립적인 기업으로 간주되지 않으며 지점에대한 US tax는 미국세입법 조항 864와 조항 882에 의해 손익손실이 결정된다. 우선 지점의 US income 은 조항 864에 의해 외국법인의 world-wide income을 미국내에 level of operation에 따라 분배 (allocate and apportion) 한다. 분배 방식은 매우 주관적이며 감사시 빈번히 발생하는 tax risk 이기도 하다. 다시 말해서 지점의 수입은 본사의 world-wide income을 주관적인 절차에 따라 배분하는 것이 현 미국 세법이다. 마찬가지로 미국 지점 지출 또한 미국세입법 조항 882에 의해 본사의 world-wide expense를 지정된 formula에 의해 배분한다.

위에 설명했었던 것과 반대로 지점이지만 독립된 기업처럼 보고하는 “Separate Entity Method”을 이용하는 회사들도 종종 볼 수 있다. 이 방법은 세법상 허용되지 않은 방법이기 때문에 모회사에 매우 큰 위험 요소 이다.

지사와는 달리 지점은 독립적인 법인이 아니기 때문에 미국에서 발생된 법적문제나 채무는 외국 본사에게 직접적인 영향을 미친다.